Though Democrats denied it during the 2012 campaign, Obamacare cut Medicare by $716 billion in order to partially fund $1.9 trillion in new entitlement spending over the next ten years. A big chunk of those Medicare cuts came from the market-oriented Medicare Advantage program. Cleverly, the Obama administration postponed the Medicare Advantage cuts until after the election, so as to persuade seniors that everything would be just fine. But the election is over. On Friday, the administration announced that it would be significantly reducing funding for the popular program. Obama’s proposal, according to one analyst, “would turn almost every plan in the industry unprofitable.”

Democrats have long been hostile to the Medicare Advantage program, which allows seniors to get their Medicare coverage through plans administered by private insurers. Today, more than a quarter of retirees get their coverage through Medicare Advantage, and the program has experienced rapid growth over the past decade. Richard Foster, the recently-retired chief actuary of the Medicare program, has projected that Obamacare’s cuts to Medicare Advantage would force half of its current enrollees to switch back to the old, 1965-vintage Medicare program. Robert Book and James Capretta estimate that this will cost enrollees an average of $3,714 in 2017 alone.

New rates to be ‘enormously disruptive’

The new rates proposed by the Centers for Medicare and Medicaid Services, a.k.a. CMS, will have the net effect of reducing payments to Medicare Advantage plans by 7 to 8 percent in 2014, according to Citi managed care analyst Carl McDonald. “This includes the 2.3% reduction in per capita growth rate announced by CMS on Friday, and estimated 2-3% drop as rates move to parity with fee for service…a 1.5% reduction associated with the change in coding intensity adjustment” and the 2% health insurance premium tax. “These negatives are partially offset by an estimated 1% benefit from improved Star quality ratings, re-basing, better risk scores, and fee for service normalization, resulting in an overall decline of 7-8%,” wrote McDonald yesterday in a note to clients.

Because the typical for-profit managed care plan targets profit margins of only 5 percent, and non-profits even less, the net consequence would “turn almost every plan in the industry unprofitable,” according to McDonald, unless CMS changes its proposal. “If implemented, these rates and the program changes CMS is suggesting would be enormously disruptive to Medicare Advantage, likely forcing a number of smaller plans out of the business and creating disarray for many seniors.”

Could CMS bend the rules again?

CMS didn’t issue these rates because they’re mean. Obamacare requires these rate cuts; indeed, as I noted above, they were supposed to have been implemented before the election. “We appreciate that plans are facing several legislatively mandated changes affecting payment for 2014,” CMS’ Jonathan Blum and Paul Spitalnic write in their 199-page report. “We solicit comment on suggestions to address these challenges within the parameters of current law.” The final rates are to be issued on April 1.

CMS is likely to come under pressure to once again postpone the cuts, by engaging in rule-bending or accounting gimmicks. If CMS assumes that Congress passes a “doc fix” by the end of the year, in order to avoid a 25 percent reduction in physician reimbursement rates, plans could benefit from a 4 percent increase in government reimbursements. Understandably, CMS normally doesn’t incorporate the “doc fix” into its calculations unless one has been actually passed by Congress. CMS could also decline to implement a recalibration of its risk adjustment formula, something that would ease the pressure on insurers.

2014 will be the year when reality hits

It’s important to reduce the amount that the government spends on Medicare, and to do so in a way that minimally affects the care that seniors receive. The simplest way to do this is to gradually raise Medicare’s eligibility age by three months each year. Now that we have Obamacare’s insurance exchanges to support lower- to middle-income seniors, it’s not necessary to force Americans to pay taxes in order to subsidize health insurance for wealthy seniors like Warren Buffett and Mitt Romney.

But Obamacare chose a different path, one that will force more Americans into creaky, out-of-date programs like Medicaid and Sixties-era fee-for-service Medicare. The law will dramatically increase the cost of privately-purchased health insurance, something that Obamacare supporters are only now starting to admit.

There will be much more to talk about as the Obama administration issues the rates, regulations, and mandates that the “Affordable Care Act” requires. Stay tuned.

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“Richard Foster, the recently-retired chief actuary of the Medicare program, has projected that Obamacare’s cuts to Medicare Advantage would force half of its current enrollees to switch back to the old, 1965-vintage Medicare program, costing enrollees an average of $3,714 in 2017 alone.”

Don’t you just love it when a plan comes together. I guess the nay sayers were right again. Obama’s lies get bigger and faster then the deficit. You wanted to have a change, so now you are just seeing the beginning of the end. A country without God and the Constitution is just another group waiting to be enslaved. You voted for him the first time to prove that you were not prejudice. And you voted for him the second time to prove that you were stupid. Enjoy the change yet????

medicare advantage is a taxpayer subsidized lifestyle medical insurance program. It pays for yoga classes and fruit smoothies. I am all for going back to basic care, that is provided by the so -called 1965-vintage medicare program. The advantage plan was always meant to be an experiment, not a permanent part of Medicare. I am surprise this Forbes writer contradicts Forbes’s editorial push to cut government spending. I guess Forbes want to do the cutting at the expense of the lower half instead of the upper half.

Yes, I read it. It shows a lack of research, not a journalistic piece but rather a political opinion piece.

The fact is that this article is based on ideological ground: that the quest for profit will solve all human needs. ( did not work well in the financial industry)

I am a volunteer for a local hospital. The administrators there are talking about following the Mayer’s clinic’s model of care. I presume there’s nothing in obamaCare that forbids it or else they would not be thinking about implementing it. There’s also fee for service care.

I am glad there will be an exchange. For once there will be some kind of transparency into the pricing of these insurance product. Right now, there is no way for any individual to know what they are buying in the private, market place. Some medical insurances don’t even pay for basic care.

It’s not about the absolute price. it’s about the value relative to price. Until we know the value, we can’t price anything.

Could you cite the source of your information? (such as the cost of Medicare back to 1965. In order to make valid comparison we also need present day data.) I hardly think 1960s Congress would have approved of luxury medical care. it’s the intent that I am interested in.

I know it’s private insurance. I am pointing out it will be an improvement compare to what we have now. I am speaking from personal experience of having to purchase private medical insurance as a single individual.

Go google Mayer’s Clinic Model of Care. You may or may not like it. What I wanted to point out is that there’s all kinds of financial model that a hospital is free to follow. Manage care is taking on Medicaid patients. There will be more choices for consumers. It’s a start. No one say it’s perfect or ever will be.

“Could you cite the source of your information? (such as the cost of Medicare back to 1965.”

The cost of Medicare back to 1965 is irrelevant. What matters is the cost today.

The 2013 cost of Part A is more than $425 per person per month. The cost of Part B is roughly $400 per person per month. You can call Medicare to verify. That’s how I found out. (You will find that Medicare does not like to give out this information – wonder why?) The total cost is more than $825 per person per month or $10,000 per year per person.

For benefits, you can read the Medicare handbook. The deductibles and cost sharing are significant: the Part A copay is $1,184 per admission. Part B requires a $147 annual deductible and then pays at 80% of its “allowed” charges. There is no limit to the 20% residual that you are responsible for – meaning you can go broke with original Medicare alone. There are other coverage deficiencies. Benefits as skimpy as Medicare’s would not be approved for sale in any Exchange and would not qualify for a subsidy.

“I know it’s private insurance. I am pointing out it will be an improvement compare to what we have now.”

You assert that – but you have yet to give reasons why it is true.

“Go google Mayer’s Clinic Model of Care.”

Your Google may have the scoop on Mayer’s Clinic Model of Care. My Google has nothing on it.